Kenya: Tax bumps in the air

VAT on aircraft requires further thought, in order to make Kenya’s aviation sector more competitive

Plans to overhaul the 1989 VAT Act were first announced in June 2010 and a draft bill was published in August 2011, with public forums held in January 2012. In June that year the VAT Bill 2012 was published. An updated version followed in June 2013, when the VAT Bill 2013 was published and enacted into the VAT Act 2013 on 14 August with a commencement date of 2 September 2013. The effect of the new Act was immediate, and Value Added Tax, known in some quarters as Very Annoying Tax, was instantly felt.

For the aviation sector the VAT Act 2013 came with tax bumps in the air. By exempting VAT on small aircraft and charging it on large aircraft, the VAT Act 2013 created a turbulence that caused a slowing down of investment in the aviation sector.

The aviation sector players can only hope that the proposed amendments to the Finance Bill 2014 will consider their dire circumstances.

The question remains, though: how will Kenya show consideration and directed thought process towards a sector that the legislation seems to have confused on taxation of its basic assets of trade – aircraft?

The VAT Act 2013 was supposed to be a simpler and more efficient Act for VAT administration. In so doing, Part 1 of the First Schedule to the VAT Act 2013 exempts helicopters of an unladen weight not exceeding 2000kg (tariff code 8802.11.00), helicopters of an unladen weight exceeding 2000kg (tariff code 8802.12.00), and aeroplanes and other aircraft of an unladen weight exceeding 2000kg (tariff code 8802.20.00). This was OK while it lasted. The VAT amendment Act of 2014, which was designed to cure the apparent conflict in description and tariff codes and became effective on 29 May 2014, appears to have gone to the other extreme.

The amendment substituted tariff 8802.20.00 with aeroplanes and other aircraft of an unladen weight not exceeding 2000kg. By virtue of exclusion, the supply or importation of aeroplanes of unladen weight exceeding 2000kg is subject to VAT, which has been a source of concern for the aviation industry.

Under Part II of the First Schedule to the VAT Act 2013, Paragraph 18 provides that the hiring, leasing and chartering of aircraft is exempt from VAT. This makes the leasing of aircrafts more tax appealing than outright purchase.

In an effort to move forward and grow the industry, the supply or importation of aeroplanes of unladen weight exceeding 2000kg should be exempt from VAT. By so doing we become competitive, lucrative and open to investment in the aviation sector. This also aligns well with the plans to make Jomo Kenyatta International Airport the number one aviation hub in Africa.

The aviation sector players can only hope that the proposed amendments to the Finance Bill 2014 will consider their dire circumstances and smoothen out the turbulence that is VAT on aircraft imports.

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